Regulation, Taxation, or True Effective Enforcement?

    Regulation's efficacy and methods are not a mystery buried in some ancient tomb. It consists of little more than channeling people’s most utilitarian behaviors. Regulators can basically choose to punish, award, or charge the actors in the marketplace to reach their regulatory objectives. Rather than regulate under the assumption that every market actor will try to please the regulators by behaving obediently and with a conscience, most people choose to believe punishment and proper enforcement are more expedient.

    While I am not attempting sanctimonious irony here, human beings know what the right things are to do rather than actually doing the right things. We know enforcement mechanisms are the foundation to an effective regulatory agency, we just can’t stop promulgating lengthy rules while at the same time collectively ignoring how to make sure those rules are adhered to. And such problems are even more serious in the financial regulatory perimeter. More complicated, lengthy, and annoying regulations usually mean we are now facing a “regulatory malfunction” problem. The Dodd-Frank Act itself is at least a voluminous 800 pages (the pages vary in quantity depending on what version you choose), let alone the pages of rules that all the financial regulators in the United Stated are required to propose under this Wall Street Financial Reform Bill.

The Moral Solution to the Floating Cloud-- Restoring Trust, Honesty and Prudence in Contemporary Financial Regulation

    Financial scandals, or to put it precisely and more definitionally exact, financial crimes, are fraught in today’s global financial market. Although the line between fraud and excessive risk-taking behaviors is somehow blurred in the financial fraternity, these kinds of misconducts are transparent to the rest of the world outside of the fraternity. Are you comfortable with the recent Swiss bank trader scandal, where a rouge trader in London in the UPS AG’s investment banking division incurred $2 billion of losses that basically lead the firm’s third-quarter financial statement into the red? Or do you think it’s just for Goldman Sachs, the largest and arguably most experienced investment bank in the world, to create an CDO (known as Hudson Mezzanine funding 2006-1) in which the bank cherry-picked all the assets portfolios then sold it to investors, while at the same time making a whopping $1.35 billion profit by betting against the CDO? Simply put, performing a rouse, making money while duping their trusting, unsuspecting, clients.

    All these recent happenings above lead us to a core question: Do we still have trust, honesty, and prudence in our financial market, and if the answer is nay, how do we restore or redeem those virtues and values into our financial regulatory reform? Other than traditional prudential regulation, the global regulators pay more attention to an area in which the ethical practices have been ignored for a long time, that is, the “Market Conduct Regulation”.

Regulating the Shadow Banking System

    The core mission of Bank Regulation is, in my point of view, to mitigate the systemic risk to the extent that everyone in the world can afford the cost of another financial crisis. Maybe a bit pessimistic, however I do subscribe to the belief that we cannot stop the current financial crisis from happening. What the regulators and all the market participants can do basically is to mitigate the scale of them and foresee them as early as possible. This is no time for myopia. Clarity of vision is essential.

    The recent global financial reform efforts that were proposed by the G20 Financial Stability Board, the U.S.A Dodd-Frank Act, and the UK Independent Commission on Banking, all reveal a clear and common tendency: to regulate those financial conglomerates that operate both in the traditional banking paradigm and via non-traditional banking activities.

Too big to fail, systemic risk and the Dodd-Frank Act

Systemic risk will easily widespread in a system where the financial industry is highly complex, interconnected and governed by several Large and Complex financial institutions (LCFIs). The cost of rescuing giant banks may be too great for the taxpayers’ purse, and the awareness of their systemic importance may encourage them to take greater risks, which is essentially the moral hazard problem.

Democratic Peace and Liberal Peace

There are two kinds of liberal peace theory if we are to talk about democratic peace. The first concerns with how regime type may affect peace; the other discusses how liberal trade may affect the prospect of peace. I would like to introduce almost all aspect of democratic peace theory in this article.

Democratic peace is not an invention. It is a discovery. Perhaps the most important discovery in contemporary history. The liberal peace theory is always there in the thoughts of Kant, Rousseau, and Wilson. The main assumption of the theory is that democratic countries will not fight each other. The world will be a more peaceful place if it is full of democratic countries.

In late 1960s and early 1970s. IR scholar collected enough data to employ statistical test on this assumption. Surprisingly, they do found evidence that democratic countries do not fight against each other. From then on, IR scholars try to explain why this phenomena exists. Because hard evidence is so clear, and the classic thoughts do not provide a good answer to this behavior, scholars begin to present variety of reasons to explain it. There are two category of explanation.

The first is the monadic nature of democratic peace. It is argued that democratic countries are prone to peace because they are constrained by domestic politics. The public does not support the aggression for pure expansion. People are more likely to support war only if the country is being threatened or attacked. So democratic leaders who want to raise campaign for world dominance rarely get approval from the public. Democratic countries are also more peaceful because they value peace and stability. Again people do not like war; conflict disrupt their daily life, take away their family. Democratic countries prefer to resolve difference peacefully. They do not prone to use force to resolve a territorial dispute or religious difference. This suggests that if democratic countries are going to use force, the leaders must have ensured that people fully support the war. So a fighting democratic country will be more united, and therefore more chances to win. The monadic democratic peace argues that the peaceful nature is born in democratic countries. They are generally more peaceful than authoritarian countries.

On the other hand, there is dyadic democratic peace, which argues that war is less frequent between two democratic countries. Democratic countries share the same political structure, political beliefs, political traditions, and ideology. They have similar institutions that would generate similar needs, which leads to similar interests. So they are more likely to be friends in international system. They are potential allies because they can understand each other better. They usually face similar dilemma when making important foreign policy decision. And they can trust each other because their regime is similar. They may belong to the same international institutions because of common interest. There are many opportunities that make them friends rather than enemies.

The above mentioned explanations focus on the nature of democratic regimes. They behave more peacefully because democratic countries have certain qualities. But is it all because of regime type? It doesn't seem appropriate to suggest domestic political institution is the only reason for war and peace. Scholars explore another line of liberal tradition and construct another explanation base on liberal trade.

The liberal economic democratic peace is rather simple. Adam Smith told us trade is good. Trade will increase a country's wealth. More importantly, it increases the wealth of people. War and conflict usually disrupt trade, even worse, it may interrupt trade relations with foreign country even after the arm conflict. General public does not prefer war because they want to promote profit from trade. A stable, friendly relationship with foreign countries is more beneficial to them. In democratic states, leaders have to follow people's wishes. Therefore, democratic states tend not to participate in conflict. The interdependence followed by trade relationship further decreases democratic state's willingness to use force. Democratic states tend to use non-violent ways to resolve the dispute. To the extreme, one may argue that democratic peace is actually capitalist peace. It is just that democratic states usually prefer trade and they usually do trade with other countries so they are less prone to use force.

There are certainly more literature discuss more specifically about democratic peace. The debate about whether it is regime type or liberal trade that causes democratic peace is still going on. I should introduce more interesting works in other articles.

Regulating Credit Default Swap

Regulation of Credit Default Swap (CDS) is probably the most contentious topic in terms of the global financial reform in the post-crash economy. Some people believed CDS is the main cause of the Global Financial Crisis, and conceived it as simply a form of speculation or, to put more explicitly, a gamble. I am not going to argue for any side but just would like to express some thoughts on the recent regulatory reforms on CDS.

Post counterterrorism world politics

Today, President Obama announced and confirmed the leader of Al Qaeda, Osama bin Laden, was dead. The "War on Terror" initiated by the United States has achieved major victory. Obama would not give up this great opportunity to increase his popularity. He specifically said that the operation was under his instruction.

I was at school gym. I watched Obama's speech on TV, thinking about the impact of bin Laden's death. Several college boys walk by, applauded, and shouted out loud. I did not laugh. I was pondering, like ten years ago, about how world will change afterward.

power balance and international system

The concept of international system has been, and always been, the center of debate in the filed of international relations. The term itself can be very confusing. What is a system? Isn't it the international relations as we know simply a collection of episodes of international affairs? Isn't it the so called diplomacy an official interaction between civilized states? When IR scholar tried to depict international relations a century ago, they adopted classical works to explain the environment where states operate, compete, and interact. The core assumption of such environment is anarchy. Using Hobbes' word, this is a world "all against all". Every state is a unit in this environment; each of them is selfish. More importantly, no one can ensure the security of others.

The international system is a term that we describe such environment. Morton Kaplan once presented six types of systems. For over 3 decades, students of IR debated what constitute international system and how system can or must influence state behavior. Waltz, in his seminal book "Theory of International Politics", refute the previous system theories and call them "reductionism". He separates system level variables like anarchy from domestic politics like territorial aggression, therefore he constructs a level of analysis approach that establishes a theory of systemic effect.


The main question behind this clarification of terminology is what we are interested in-- how does international system explain state behavior. If states struggle to survive in anarchic world. They need to estimate, calculate, and measure the strength of other states. A powerful state is dreadful. It is capable to plunder and annihilate other states. Therefore, states always pay close attention to the material capability of itself and other states. This usually includes the size of military, the advancement of weaponry, the amount of territory,n number of population, and strategic resource or location controlled by a particular state. Material capability is a direct representation of a state's ability to conquer other states. In other words, material capability decides how powerful a state is.

International system is not a static map. State power grows and declines throughout time. There are various ways for a state to increase its power, usually from domestic change, like territory aggrandizement, new research breakthrough, and succession. States are sensitive to relative power change, not absolute power change. For example, State A has 1000 troop and recruit 300 soldiers and State B has 400 troop but recruit 600. Numerically state A should not be worried because its military still outnumbers state B by 300. But in reality, state A is nervous because B's military expansion rate is higher than A. If B continue to enlarge its military, it will eventually exceed A.

This explains an important phenomena in international politics: the rising state. Consider that we set current power distribution as status quo, and we know that state power fluctuates, then the states that quickly expand its power are rising states. The already powerful states are status quo states. Status quo states enjoy advantage in international system. They are powerful enough to ensure their survival in the system. But now there is a rising state in the system, and no one can guarantee this rising state would not threaten the survival of status quo state in the future.

Therefore, the status quo states need to deal with rising states. Historically, balance of power is the main tactic to deal with rising states. Several states having similar security interest stand together though formal alliance or informal alignment. The rising state, in order to counter status quo states, will also form its alliance. Theoretically, there will be two group of countries form a bipolar world in international system. The reason is simple, if there is a third party in the system, the other two will try to earn its allegiance and encourage it to join their side. It is difficult for a third party to remain neutral because it can be the target of the other two if it insists its neutrality. The tripolar system will crumble quickly so it is rather rare and short-lived in our history. Schweller argues that interwar period is a tripolar system consisted US, Germany, and the Soviet. Germany launch war to absorb other states in order to attain victory in its competition of European hegemony with the Soviets. Germany did defeat the Soviet during WWII and almost achieved its European dominance.

Balance of power can be a simple aggregation of material power. If the aggregate power of two camps are equivalent, no states will risk an unpromising war. Therefore, balance of power theory argues that bipolar system where competing states have equal power tend to be less prone to war. On the contrary, a highly unbalanced competition will result in war that the stronger will eliminate the weaker party. Waltz and Sagan further examine the balance of power in nuclear age. Nuclear weapon as a powerful defensive weapon with its unprecedented destructive power can deter the attack from a enemy. Ironically, bipolar nuclear deterrence brings fear for nuclear war as well as prospect of peace. Soviet Union never risked invading west Berlin or NATO states for the fear of US counter attack; similarly, US discouraged Chiang Kai-Shek's ambition to return to mainland China in order not to provoke Soviet involvement.

Balance of power is theoretically sound and usually adopted by modern states as Kissinger outlined in his book "Diplomacy". But it is not always effective empirically. WWI seems to be a failing example of balance of power. The Triple Entente failed to deter Triple Alliance. And Italy betrayed its allies in this war. The end of Cold War also poses a challenge to the theory. There is only one superpower left in the system, and other state did not form an alliance to counter it. On the contrary, US hegemony is widely accepted and tolerated. The US did not use force against major great powers in the system but stay peace with them, even though it did use force in Balkan and middle east. The hegemonic stability and great power peace suggests that a preponderant power does not necessarily cause war and conflict.

This is called power transition theory in IR. It argues exactly contrary to balance of power theory. War is more likely when two states or camps reach equivalent power. Because states care about relative gains, equivalent power means one state will surpass the other very soon. To preserve the status quo and tactical advantage, the more powerful one will launch attack to weaken or eliminate its enemy. In other words, balance of power is dangerous. Any party in such relationship will open war any time. Preponderance power will ensure that no one is dare to challenge the status quo. The hegemon also want to maintain such advantage in the system, so it will not repress the weak states but cooperate with them and domesticate those who do not behave as the hegemony wants. Weak states may exchange survival, and perhaps prosperity, by its submission.

The debate between balance of power school and power transition school does not have clear conclusion. It is common in ivory tower. Two camps continue using empirical evidence to support their theory. Our understanding of international politics has gained significant progress during the process. In the unipolar world today, it seems the power transition theory can better explain the world order. But at the same time, we have to remember that the world also pay close attention to the rising power in the system. The rising China, for example, may become the next pole of a bipolar balance of power. The nature of international system remains to be anarchic as realist always argues. States still employ balancing tactics, and power competition is still the core of the game in international politics. Although we have gained extensive knowledge about international system, the systemic effect on state behavior will continue to be the most important subject in our discussion of IR.

Time to turn focus on the fake “Prometheus”

    Everything has its price, from a physical good to an intangible financial product. Price itself is not rational or reasonable at all. Rather, price to a certain product is in fact built up based on perception and expectation. When people perceive something as valuable, and expect such “value” could sustains as long as possible, and then this perception will start to be contagious until the reality comes in a totally opposite direction. Bubble is often used to describe such kind of burst of illusion. When a bubble goes burst, then that means those who behaved heavily relied on the perception that this bubble would never stop enlarging itself, will suffer incredible pains and inner explosion. Just like what we observed from the 2008 Global financial crisis, a burst of house price bubble dampened the price of those residential mortgage based securities and further triggered the chain reaction that melt down the whole financial system.

Constructivism and Socialization

The last two articles discussed too much material subjects- military, conflict, and war. Let's talk about another rising theoretical approach in IR theory- constructivism. Contrasting realist and institutionalist argument that discusses how the human nature guides the development of international politics, constructivists explore the source of behavior: what affects the fundamental belief of a state or an international organization.

On deterrence

As for today, deterrence sounds like a symbol of the old age, an outdated term prevalent during the Cold War, spoken by those passing leaders like Kennedy and Brezhnev.

Deterrence describes a situation that one state shows enough power to persuade the other state from attacking the state. This term was so popular during the Cold War because it precisely represented the relationship between the U.S. and the Soviets. Both of them possess formidable nuclear armory. They were able to launch second strike, the ability to fight back after first round of nuclear strike, to each other. Because of the fear for nuclear retaliation, both of them dared not to attack the other in the first place. This was how war became "cold".

Let's talk about Financial Regulator itself

Financial supervision and regulation itself is not self-executing. Certain form of organization should be empowered with clear and unambiguous mandate to carefully conduct the regulatory and supervisory regime in an impartial and professional manner. While serving as the locomotive to simulate the economy through its intermediary financing function, Financial Industry sometimes even “functioned” as the Weapons of Mass Destruction to destroy the whole financial stability. Such gigantic and powerful “engine” is essentially funded and promoted by government, sometimes even empowered with unlimited funding sources when it goes burst. Regulating and supervising the financial industry is basically the practice of democracy, through authorizing the surveillance power to an executive agency, we, the taxpayers, should be capable of cultivating a fruitful farm and choosing not to put more money and resources when that farm land becoming desolate, barren, or ravaged.

on interntaional conflict

International conflict, namely, inter-state war, skirmish, and crisis, has been a big question in IR.

War has been a concurrent phenomena in human life. In every period of history, from tribes to states, people mobilize and organize soldiers to defend their territory or invade others'. Conflict is performed by trained professional military, which has hierarchical command system. The battle is usually decided when one party suffers heavy casualty and cannot continue fighting. The victorious party gains what it wants and sometimes demand the loser to relinquish territory and material resources.

Internationalization of Chinese Yuan – Is it too early to say it's the “Redback v. Greenback War”?

   The challenge posed by the Chinese Yuan (Renminbi) to the US dollar doesn’t necessarily entail a full-fledged war between the Redback and the Greenback. A currency that is yet to be internationalized is simply an unarmored warrior. Even with unbeatable bravery, sacrifice is still unavoidable.

Since the post-financial crisis era, politicians, commentators and scholars around the world all look forward to a rising Chinese Yuan, not only in terms of its exchange value, but also its role to adjust the long-term imbalance of the global currency system, which has long been driven by the world’s largest banknotes printing machine, United States.

Rather than complaining about the unwelcomed quantitative easing pills the U.S forced the world to swallow, the world has moved on to find a solution: a currency that is capable of taking over the dollars’ dominant role. Unfortunately, Euro got bogged down by serious sovereign default and insolvency situations; the Japanese Yen, which has not yet fully recovered from its bubble economy, has been worsened by the devastating earthquake, tsunami, and nuclear crisis and is thus incapable of bearing such grievous mission. Now, everybody turns to China and its heavily undervalued Renminbi.

Democratization, civil society, and contemporary politics in Taiwan

The reason I want to start this article is that I attended a forum yesterday in Georgetown University. Several speakers talked about the past, present, and the future of democratization in Taiwan. The forum is basically designed for undergraduate students. The speakers took most of the time discussing historical events from post-1945 to 2000. The talk was full of policy initiatives. It was as if going back to my undergraduate time when all we talked about was international affairs, foreign policy making, and bilateral relationship. It was quite different from the IR literature I now dedicate to, which is more generalizable and more theoretical. The atmosphere in Georgetown is definitely quite different from other research institutes. It is more policy-oriented, more facts, logical analysis, observational arguments, and less grand theory.

Luxury Tax for Taiwan House Market, Is That Enough?

   According to a survey released by the Construction and Planning Agency of Taiwan yesterday, Taipei house prices reached an historical high in the forth quarter of 2010. For quite a long time, rocketing house price has became one of the most important issues of financial regulation in terms of equality and justice in Taiwan. Youths in Taiwan basically can not afford such distorted price structure caused and sustained by overheating speculative house investment behaviors of the rich. And the situation is even worsen by the low interest rate that has been sustained for a long period.